Profit Taking Kills Rates Rally Again. Reprice Outlook Varies

By:

Shortly after rates hit their best levels of the day around 10:20am (on short covering), which prompted us to issue a positive reprice alert, profit takers rang the register and pressured both MBS and TSY prices lower. Traders were motivated to book P&L gains as benchmark TSYs closed in on technical resistance at 3.09% and stocks pushed into positive territory.

Four times this month we've seen profit-taking and short-selling prevent 10s from breaching 3.09% rally resistance. The 3.125% coupon bearing 10yr note is currently -6/32 at 99-29 yielding 3.138%.  Trading volume is especially high in the futures market. 1.15million 10yr contracts have already traded hands. That's well-above average....

Rate sheet influential MBS coupons are outperforming benchmark hedges but still declining in price. Current coupon yield spreads are tighter vs. 10yr TSYs, swaps, and the 5y/10y blend (thanks to flatter yield curve).  The FNCL 4.5 is -1/32 at 103-17 and the 4.0 is -2/32 at 100-08.

C30 loan pricing is 18.1bps better on average among the five major lenders. These rebate improvements reflect MBS price gains that were not passed along by four of the 5 major lenders yesterday afternoon. If you received reprices for the better yesterday and loan pricing improved further this morning, you are at risk of losing those additional bps this afternoon, especially if MBS prices fall further.  We'd look for recalls to begin around 103-14 on FNCL 4.5s. If you did not receive reprices for the better yesterday afternoon and loan pricing improved today, you have a bit more cushion to work with, we'd target 103-10 on FNCL 4.5s. Anything below that level and reprices for the worse are almost guaranteed.

NEXT EVENT: Treasury auctions $35bn 5-year notes at 1pm. This auction has the potential to move the needle.